The Gilmo Report

August 31, 2011

August 31, 2011

The NASDAQ Composite Index made it to the 2600 level today, hitting a high of 2611 as it pushed into logical resistance in and around the 2600 price level. As I discussed in my August month-end video this past weekend, as well as in prior reports, this is a logical area for the market to rally to, as the 2600 price level on the NASDAQ also roughly represents the 50% retracement level of the prior downside break off the peak in August, as shown below. Volume increased today as the early morning gap-up that had the NASDAQ up 1.36% not too long after the open faded later in the day. With the index barely managing to hold onto a gain of 0.13% by the close, the day had the distinct smell of sharp churning on higher volume compared to yesterday. If one is looking to short this market rally off the recent lows, then this convergence of resistance and a 50% upside retracement is an area where selling short may have an increased probability of success. One way to approach this would be to go long an inverse ETF, such as the 2-times leveraged NASDAQ 100 Index ETF, the QID, using the 2611 high of today in the NASDAQ as a quick stop level. When it comes to individual stocks, those rallying into logical resistance as the market does the same thing become prime short-sale targets.

NASDAQ Composite Index Gilmo Report Chart

As well, your chances of success on the short side are better if you go after those stocks that have rallied the weakest among any previous short-sale target stocks you may have had on your list. One example would be the former leading stocks in the retail sector. Deckers Outdoor Corp. (DECK) is one of the weakest as it has wedged up to its 50-day moving average on light volume over the past several days and today reversed at the 50-day moving average on heavier volume, as we see on the daily chart below. Thus this becomes a very reasonable short-sale target, using the high of today at 92.66 as a quick stop. DECK is a potential late-stage failed-base short-sale set-up, and if it is going to pan out as a viable play to the downside then this is the spot to be shorting it. Other retailers that have rallied into resistance and look potentially shortable are 1) Nordstrom (JWN) using a stop at today’s high of 46.69; 2) Limited Brands (LTD), which rallied about 5% past its 50-day line, using a stop at today’s high of 38.66; 3) Under Armour (UA), using a stop at today’s high of 73.36; and 4) Estee Lauder (EL) using a stop at today’s high of 99.09. All of these, including DECK, are viable shorts at current price levels using the proper stops.

Deckers Outdoor Corp. (DECK) Gilmo Report Chart

Tiffany & Company (TIF) has been a fascinating rally to watch with earnings helping to propel the rally along four days ago on big upside volume, as we see in the daily chart below. As with most of the weaker retail stocks, their recent rallies have retraced about 50% of their prior downside moves off the peak, and we can readily see that in the charts of DECK, above, and TIF, below. In this sense they are mimicking the market. TIF’s rally has carried it just past the 65-day exponential moving average but right into a zone of potential resistance defined by the lows of the left shoulder in what may be a head and shoulders topping formation. There is potential for the stock to continue rallying up to the 50-day moving average just above the 74 price level, but I would look for overhead resistance from the lows on the left side of the pattern to come into play first. The 50-day line is less than 5% away from where the stock closed today, so the risk in testing the stock here on the short side is relatively low if one were to use the 50-day line as one’s stop.

Tiffany & Company (TIF) Gilmo Report Chart

All of the big Chinese internets that I’ve been watching, BIDU, SINA, SOHU, and NTES have rallied up into potential upside resistance at the peaks of recent rallies, and Sohu.com (SOHU), shown below on a daily chart, is a reasonable representation of the others. Like the others, SOHU has rallied back above a key moving average, in SOHU’s case the 200-day line. SOHU pushed about 3% past the red moving average on the chart and found resistance today right near the 84 price high of not-quite three weeks ago. Volume on this rally is lighter than the prior rally up to the 84 price level, so in my view it has a reasonable chance of failing from current levels. At the very least, a tight stop-out level can be used at the 84 high if one were inclined to short the stock here. Like most leading stocks that have been rocked during this recent market sell-off, the sharp rally off the mid-August lows has occurred on below-average volume, thus it is likely that the rally will fail at some point. This is a reasonable point for it to fail, and SOHU would be my first choice to short among the Chinese internets if I want to be short something in the group right here.

Sohu.com (SOHU) Gilmo Report Chart

Rackspace Hosting, Inc. (RAX) is trapped underneath a large area of congestion mostly defined by the double-bottom base from which it tried to break out of in early July but failed, as we see in its daily chart below. Among the former tech leaders, RAX looks to be in one of the weaker positions here given that it has been unable to rally back above its 200-day moving average and today found resistance at exactly that spot as volume remained well below-average. As I saw it, the huge gap-up in the general market at the open helped to lift RAX above the 200-day line. But the buying interest was not sufficient enough to hold the stock on the topside of this key moving average and it closed the day down, well below the 200-day lne. Today’s high at 37.09 makes for a convenient upside stop if one shorts the stock at current price levels. I would also look for selling volume to pick up on any continued move to the downside and away from the 200-day line as confirmation of the stock’s potential to at least test the prior lows around the 32 price level.

Rackspace Hosting, Inc. (RAX) Gilmo Report Chart

Over the weekend I had some constructive observations to make about Apple, Inc. (AAPL), shown below on a daily chart, but I have to admit I did not like the way Monday’s gap-up move to higher-highs panned out. The first problem I have with it is the fact that the gap-up occurred on extremely light volume, the second is the fact that the stock, after initially gapping up, churned around and made little additional net price progress. And finally, I did not care for the way volume picked up today and the stock backed down, filling the gap and moving to the bottom of the “rising window” from Monday. Furthermore, with the NASDAQ blasting its way up to 2600 over the past four days I would have expect AAPL to be leading the charge, and in fact over the past three days the stock has lagged the NASDAQ Composite Index. Thus while I would not necessarily be looking to short AAPL, I am not otherwise interested in being long the stock right here, particularly with the NASDAQ running into solid resistance at the 2600 level today. Other possible long situations that I discussed over the weekend in MA and HANS, have also acted feebly over the past three days.

 

Silver and gold continue to work their way through their respective consolidations following last week’s sharp sell-off that likely occurred on leaked news of the CME raising margin rates for gold, which was announced Wednesday after the close. SPDR Gold Shares (GLD), shown below on a daily chart, has recovered and is back to holding above its 10-day moving average. Notice also that volume dried up today on the downside as gold and the GLD pulled back just slightly. Pending any further buy points, I would be looking to buy gold on any pullback that took the GLD below the 170 price level, or on any continuation pocket pivot buy point, perhaps off the 10-day moving average. Of course the GLD would have to exceed the very heavy selling volume of six and seven days ago in order to generate a pocket pivot buy point. But as those high-volume days recede further into the past the GLD’s chances of staging a pocket pivot obviously increase. So I think one is at least looking out another five days before the GLD could set up in such a manner.

SPDR Gold Shares (GLD) Gilmo Report Chart

With the NASDAQ Composite Index failing at resistance in the 2600 price level, I believe would-be short-sellers can take shots at broken-down former leaders that have staged some of the weaker rallies over the past couple of weeks. Thus I have detailed my preferred picks in this regard further above in this report. Today’s rally had the look and feel of month-end window-dressing, and I am looking for this rally to possibly fail in the next few days, perhaps sooner. Meanwhile, gold and silver continue to look okay as they work through their current consolidations. Friday’s job’s number is not likely to have any surprises, just as today’s ADP jobs number did not surprise anyone, coming in at 91,000 jobs vs. expectations of 100,000. There is always potential for the NASDAQ to continue higher as the 50-day moving average could always come into play at the 2655 price level, but for now I’m willing to go with this first line of resistance as a potentially higher-probability area at which to begin getting short again. For those who might like to play this probability of the rally failing right here, then the simplest way would be to buy the two-times leveraged inverse NASDAQ 100 ETF known as the QID, and then use the 2611 high of today on the NASDAQ as your stop-out guide. If you like more juice, then the three-times leveraged cousin of the QID, known as the SQQQ, or as I like to call it, “The Skew,” also works, but carries more risk, so keep this in mind when choosing your inverse ETFs. Stay tuned!

Gil Morales

CEO & Principal, Gil Morales & Company, LLC

Principal and Managing Director, MoKa Investors, LLC

At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, and/or Gil Morales & Company, LLC held positions in AGQ, DGP, DECK, SQQQ, and RAX, though positions are subject to change at any time and without notice.

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